| Abstract: |
After the Economic Crisis in early 1990s the Finnish economy has recovered
rapidly, and simultaneously a major period of equalization from the mid 1970s
to the mid 1990s has been reversed, taking the levels of the Gini coefficient
in a few years back to levels of inequality found 30 years ago. The paper
examines how changes in Government policy, and in particular, in the
incentives introduced by tax reforms have influenced income inequality. The
paper introduces a decomposition of the Gini and concentration coefficients by
population groups which are calculated for before- and after-tax incomes to
consider evolution of income inequality and tax progressivity in Finland over
the period 1990?2004. Decompositions of the Gini coefficient of after-tax
income by income sources give little information on the effects of taxation.
In contrast, popular measures of tax progressivity (Reynolds and Smolensky
1977) show a significant decrease. Our decomposition of the progressivity
measure by income deciles focuses on changes in tax treatment of the income
deciles in the ten year period after the mid 1990s. The changes in the decile
shares of before-tax and after-tax income among those in the highest
before-tax income deciles are the main factors that lie behind the recent
change in tax progressivity, and play an important role in explaining the
recent surge in inequality. These changes have been accompanied with a change
in the composition of factor income. There has been an unprecedented increase
in capital income which has mainly accrued to the population groups at the
high end of the income distribution after the mid 1990s. The change is most
clearly seen among those in the top income percentage. The 1993 Finnish tax
reform introducing the Nordic dual income tax model, and creating strong
incentives to shift labour income to capital income for those in the highest
marginal tax brackets, is among the key policy decisions responsible for this
trend. Interestingly enough, but consistent with the income shifting
hypothesis, we find no increase in horizontal inequality in response to the
introduction of the dual income tax. |